Bitcoin Traders Turn to Derivatives in Droves: The Ultimate Sign of Crypto Winter?

Amidst the worst bear market in the 10-year history of the crypto market, Bitcoin traders have pivoted from long-term strategies to derivatives and options.

Source: Coinmarketcap.com

According to a Bloomberg report, individual Bitcoin traders, as well as many initial coin offering (ICO) projects and investment firms, are engaging in over-the-counter (OTC) derivatives trading.

Hundreds of Millions of Dollars in Bitcoin Derivatives

Outside of the crypto exchange market, investment firms like QCP have actively been trading derivatives with other entities within the digital asset sector.

The report revealed that QCP has initiated several multi-month call options with counterparties such as ICOs and miners.

Derivatives deal in the OTC market would work like this: if an investment firm projects the Bitcoin price to go up in the near-term, it strikes a deal with an entity holding a certain amount of Bitcoin.

If the price of Bitcoin hits the target of the investment firm, it will be able to purchase the amount of Bitcoin listed in the options contract based on the market price of when the deal was established.

However, if the price of Bitcoin falls, the counterparty gets to take a premium plus the original amount of BTC that was initially offered.

Last month, Bloomberg reported that QCP established a deal with an ICO project involving 250 BTC worth $900,000 when the price of BTC was $3,625.

Chart via TradingView

QCP and the counterparty agreed on a strike price of $4,200 and if BTC increases above the $4,200 mark in the upcoming months, the investment firm will be able to purchase 250 BTC at $3,625. But, if BTC falls, it will have to pay the ICO project $66,250.

ICO firms, mining companies, and individual investors in the cryptocurrency market are actively engaging in such deals due to the lack of volatility of cryptocurrencies and the massive 80 percent decline the asset class has suffered since January 2018.

Alameda Research CEO Sam Bankman-Fried said that investors are trying to acquire as much cash as possible during the bear market to acquire digital assets as they fall in value.

“Anyone sitting on a stockpile of tokens saw in the bear market of 2018 that their business is at the mercy of crypto prices. It can be crucial for those players’ survival to have some cash if digital asset prices go down,” Bankman-Fried said.

As of February, around $500 million is estimated to be involved in the OTC Bitcoin derivatives market.

Ultimate Sign of Crypto Winter

Investors have become desperate to acquire more cash in the bear market, foreseeing a further drop from the current price range.

Optimistic deals such as Morgan Creek’s recent $40 million raise from two public pension funds, an insurance company, a university endowment, and a hospital have improved the sentiment of the market.

This morning our team at Morgan Creek Digital announced a new $40 million crypto venture fund anchored by two public pensions.

But, investors are still uncertain about the near-term of the cryptocurrency market and generally do not expect an accumulation to occur prior to the latter half of 2019.

“I’ve been too optimistic about the pace of institutional adoption in the past. It’s coming, but I can’t estimate which quarter (Whether that’s this year or 2022) that we’ll see a big spike. As a humble guess, something like Q3 2019,” Paul said earlier this month.

The third and fourth quarter of 2019 posses a variety of catalysts and fundamental factors that could lead the cryptocurrency market to increase substantially in valuation.

Historically, BTC has tended to increase in price a year before a block halvening. The next block halvening of BTC is estimated to occur in June 2020. Hence, traders expect BTC to begin recovering by around May of this year.

Major financial institutions like Fidelity, Nasdaq, and ICE are expected to introduce cryptocurrency investment vehicles around the same time frame.

However, until that point, the sentiment of investors in the cryptocurrency market will likely remain gloomy, which could fuel the activity in the OTC derivatives market.